Is China's Reform Good for Its Stocks?

Lombard Street Research's chief macroeconomist seeks to answer a question on many minds.

China has committed to a sweeping reform agenda, crucial for its long-term economic success. But the impact on growth in 2014 and 2015 is likely to be negative. Economic and financial distress may make Beijing backtrack. If not, after a few difficult years, China will have the best chance of achieving consumer-led growth of 5% a year.

Forecasting China has just become more difficult. If Beijing had opted for no reforms, there was a strong possibility it faced a major economic and financial crisis a few years from now. But...